Because it’s very important to how markets are going to behave over the next few months.

As you probably know, yesterday the US Federal Reserve voted to end its policy of quantitative easing. But it will still be reinvesting the interest payments from its $4 trillion plus portfolio and rolling over any maturing treasury securities, so it’s balance sheet will continue to grow, albeit much more slowly.

On the surface, US markets didn’t seem too fussed about the end of an era. Shares sold off around the time of the Fed’s statement and then rallied towards the close. Probably a case of “algo’s going wild” as automated high frequency traders tried to make sense of the Fed’s statement.

And the Fed did its usual job of promising to hold rates as low as they possibly could, which markets seemed happy enough with.

But the real action took place under the surface. That is, the US Dollar spiked higher again. This is an important point because when the US Dollar rallies, it usually signifies tightening global liquidity.

Think of it as liquidity returning to the source (US capital markets) and drying up…or disappearing. That’s certainly what has been happening these past few months. Since bottoming in May, the US Dollar index (which measures the greenback’s performance against a basket of currencies) has increased by nearly 9%.

That might not sound like a huge spike, but in the world of currency movements, it is. Imagine if you’re an exporter and your product just became 9% more expensive…chances are it will lead to a drop in sales as customers look for a cheaper substitute.

This is the problem with the end of QE. It leads to liquidity evaporation as ‘punt money’ returns home…which leads to a strengthening US Dollar…which hurts sales of US multinationals.

It’s not going to happen right away though. Most companies have hedging strategies in place that protect them from sharp moves in the FX markets. But if Dollar strength persists…and the chart above says that it will, then you’ll see the strong Dollar hitting companies’ revenue line in the coming quarterly reports.

Not only that, but the evaporation of liquidity in general could lead to another bout of selling across global markets. QE is all about providing confidence. Liquidity is synonymous with confidence. Take it away and you’ll see the mood of the market change.

Getting back to the Dollar strength…it’s a headache for Australia too. It’s smashing the iron ore price, and the Aussie Dollar isn’t falling fast enough to keep up. In terms of the other commodities though, things aren’t quite so bad.

All you seem to hear lately is negative news about commodities. That’s because the world prices commodities in US Dollars, and as you’ve seen, the US Dollar is a picture of strength. But if you look at commodity prices in terms of Aussie Dollars, things look a little better.

The chart below shows the CRB commodity index, denominated in Australian Dollars. It’s a weekly chart over the past five years. And y’know what…it doesn’t look that bad! Since bottoming in 2012, it’s made considerable progress in heading back to the 2011 highs.

But you’ll want to see it start to bottom around these levels. If it doesn’t, prices could head much lower.

The thing to note about this chart is that it doesn’t include the bulk commodities – iron ore and coal. These commodities tend to dominate the headlines in Australia. Things like nickel, tin, copper and oil don’t get much of a look in.

Which reminds me, in case you missed it, Diggers and Drillers analyst Jason Stevenson recently released a report on some small Aussie oil ‘wildcatters’. With the oil price low, now could be a good time to sniff around the sector.

You could say that about commodities across the board. In the space of a few years, they’ve gone from hero to zero…or the penthouse to the…

That usually means there could be some good value around. One thing you need to look for in the current environment is a decent demand/supply dynamic. Iron ore in particular is heading towards massive oversupply next year. I reckon that makes it a poor investment choice for the next few years.

You’re better off to wait until the China slowdown and supply surge knocks out the juniors and all the marginal producers….leaving the market to BHP and Rio. You’ll then probably be able to pick these mining giants up at much lower levels.

Once you find a commodity with good supply/demand fundamentals, you need to make sure the producer is low cost. That protects it against further price falls…or a rise in the Australian Dollar.

It also protects it against foreign competition. One of the issues with the Aussie resources sector in recent years is costs. Other countries have much cheaper capital and labour costs and can therefore get stuff out of the ground cheaper than us.

That brings me to a final issue: Australia doesn’t really invest in its own resource sector. Via superannuation, we have a huge pool of capital. But this mostly goes into the banks or the major miners. Superannuation capital is not high risk capital.

That means a lot of the capital that flows into the resource sector is foreign. And when global financial conditions change…like the end of QE and the strengthening of the US Dollar…that capital departs.

This will create problems and opportunities for the sector. But given the bearishness towards commodities in general, it’s probably time to start getting interested again.

A regular contributor to Growth Stock Wire, Badiali has experience as a hydrologist, geologist and consultant to the oil industry, and holds a master’s degree in geology from Florida Atlantic University.

Here he tells The Gold Report‘s sister title The Mining Report that cheap oil prices and the economic prosperity they bring can make politicians and investors look smarter than they are. Hence Badiali’s forecast that Hillary Clinton…if elected in 2016…could go become one of America’s most popular presidents. Yes, really.

The Mining Report: You have said that Hillary Clinton could go down in history as one of the best presidents ever. Why?

Matt Badiali: Before we get your readership in an uproar, let me clarify that the oddsmakers say that Hillary Clinton is probably going to take the White House in the next election. Even Berkshire Hathaway CEO Warren Buffet said she is a slam dunk. I’m not personally a huge fan of Hillary Clinton, but I believe whoever the next president is will ride a wave of economic benefits that will cast a rosy glow on the administration.

Her husband benefitted from the same lucky timing. In the 1980s, people had money and felt secure. It wasn’t because of anything Bill Clinton did. He just happened to step onto the train as the economy started humming. Hillary is going to do the same thing. In this case, an abundance of affordable energy will fuel that glow. The fact is things are about to get really good in the United States.

TMR: Are you saying shale oil and gas production can overcome all the other problems in the country?

Matt Badiali: Cheap natural gas is already impacting the economy. In 2008, we were paying $14 per thousand cubic feet. Then, in March 2012, the price bottomed below $2 because we had found so much of it. We quit drilling the shale that only produces dry gas because it wasn’t economic. You can’t really export natural gas without spending billions to reverse the natural gas importing infrastructure that was put in place before the resource became a domestic boom. The result is that natural gas is so cheap that European and Asian manufacturing companies are moving here. Cheap energy trumps cheap labor any day.

The same thing is happening in tight crude oil. We are producing more oil today than we have in decades. We are filling up every tank, reservoir and teacup because we need more pipelines. And it is just getting started. Companies are ramping up production and hiring lots of people. By 2016, the US will have manufacturing, jobs and a healthy export trade. It will be an economic resurgence of epic proportions.

TMR: The economist and The Prize author Daniel Yergin forecasted US oil production of 14 million barrels a day by 2035. What are the implications for that both in terms of infrastructure and price?

Matt Badiali: Let’s start with the infrastructure. The US produces over 8.5 million barrels a day right now; a jump to 14 would be a 65% increase. That would require an additional 5.5 million barrels a day.

To put this in perspective, the growth of oil production from 2005 to today is faster than at any other time in American history, including the oil boom of the 1920s and 1930s. And we’re adding it in bizarre places like North Dakota, places that have never produced large volumes of oil in the past.

North Dakota now produces over 1.1 million barrels a day, but doesn’t have the pipeline capacity to move the oil to the refineries and the people who use it. There also aren’t enough places to store it. The bottlenecks are knocking as much as $10 per barrel off the price to producers and resulting in lots of oil tankers on trains.

And it isn’t just happening in North Dakota. Oil and gas production in Colorado, Ohio, Pennsylvania and even parts of Texas is overwhelming our existing infrastructure. That is why major pipeline and transportation companies have exploded in value. They already have some infrastructure in place and they have the ability to invest in new pipelines.

The problem we are facing in refining is that a few decades ago we thought we were running out of the good stuff, the light sweet crude oil. So refiners invested $100 billion to retool for the heavier, sour crudes from Canada, Venezuela and Mexico. That leaves little capacity for the new sources of high-quality oil being discovered in our backyard. That limited capacity results in lower prices for what should be premium grades.

One solution would be to lift the restriction on crude oil exports that dates back to the 1970s, when we were feeling protectionist. It is illegal for us to export crude oil. And because all the new oil is light sweet crude, the refiners can only use so much. That means the crude oil is piling up.

Peak oil is no longer a problem, but peak storage is. If we could ship the excess overseas, producers would get a fair price for the quality of their products. That would lead them to invest in more discovery. However, if they continue to get less money for their products, investment will slow.

TMR: Is everything on sale, as Rick Rule likes to say?

Matt Badiali: Everything is on sale. But the great thing about oil is it is not like metals. It is cyclical, but it’s critical. If you want your boats to cross oceans, your airplanes to fly, your cars to drive and your military to move, you have to have oil. You don’t have to buy a new ship today, which would take metals. But if you want that sucker to go from point A to point B, you have to have oil. That’s really important. There have been five cycles in oil prices in the last few years.

Oil prices rise and then fall. That’s what we call a cycle. Each cycle impacts both the oil price and the stock prices of oil companies. These cycles are like clockwork. Their periods vary, but it’s been an annual event since 2009. Shale, especially if we can export it, could change all of that.

The rest of the world’s economy stinks. Russia and Europe are flirting with recession. China is a black box, but it is not as robust as we thought it was. Extra supply in the US combined with less demand than expected is leading to temporary low oil prices. But strategically and economically, oil is too important for the price to get too low for too long.

I was recently at a conference in Washington DC where International Energy Agency Executive Director Maria van der Hoeven predicted that without significant investment in the oil fields in the Middle East, we can expect a $15 per barrel increase in the price of oil globally by 2025.

I don’t foresee a lot of people investing in those places right now. A shooting war is not the best place to be invested. I was in Iraq last year and met the Kurds, and they’re wonderful people. This is just a nightmare for them. And for the rest of the world it means a $15 increase in oil.

For investors, the prospect of oil back at $100 per barrel is not the end of the world. With oil prices down 20% from recent highs and the best companies down over 30% in value, it is a buying opportunity. It means the entire oil sector has just gone on sale, including the companies building the infrastructure.

As oil prices climb back to $100, companies will continue to invest in producing more oil. And that will turn Hillary Clinton’s eight-year presidency into an economic wonderland.

TMR: The last time you and I chatted, you explained that different shales have different geology with different implications for cracking it, drilling it and transporting it. Are there parts of the country where it’s cheaper to produce and companies will get higher prices?

Matt Badiali: The producers in the Bakken are paying about twice as much to ship their oil by rail as the ones in the Permian or in Texas are paying to put it in a pipeline. The Eagle Ford is still my favorite quality shale and it is close to existing pipelines and export infrastructure, if that becomes a viable option. There are farmers being transformed into millionaires in Ohio as we speak, thanks to the Utica Shale.

TMR: What about the sands providers? Is that another way to play the service companies?

Matt Badiali: Absolutely. The single most important factor in cracking the shale code is sand. If the pages of a book are the thin layers of rocks in the shale, pumping water is how the producers pop the rock layers apart and sand is the placeholder that props them open despite the enormous pressure from above. Today, for every vertical hole, drillers create long horizontals and divide them into 30+ sections with as much as 1,500 pounds of sand per section. A single pad in the Eagle Ford could anchor four vertical holes with four horizontal legs requiring the equivalent of 200 train car loads of sand.

Investors need to distinguish between companies that provide highly refined sand for oil services and companies that bag sand for school playgrounds. Fracking sand is filtered and graded for consistency to ensure the most oil is recovered. Investors have to be careful about the type of company they are buying.

TMR: Coal still fuels a big chunk of the electricity in the US Can a commodity be politically incorrect and a good investment?

Matt Badiali: Coal has a serious headwind, and it’s not just that it’s politically incorrect. It competes with natural gas as an electrical fuel so you would expect the two commodities would trade for roughly the same price for the amount of electricity they can generate, but they don’t. The Environmental Protection Agency is enacting emission standards that are effectively closing down coal-fired power plants. And because it is baseload power, you can’t easily shut it off and turn it back on; it has to be maintained. That means it doesn’t augment variable power like solar, as well as natural gas, which can be turned on and off like a jet engine turbine. So coal has two strikes against it. It is dirty and it isn’t flexible.

Some coal companies could survive this transition, however. Metallurgical coal (met coal) companies, which produce a clean coal for making steel, have better prospects than steam coal. Along with steam coal, met coal prices are at a six-year low.

Generally, I want to own coal that can be exported to India or China, where they really need it. Japan has replaced a lot of its nuclear power with coal and Germany restarted all the coal-fired power plants it had closed because of carbon emissions goals. We are already seeing deindustrialization there due to high energy prices. Cheap energy sources, including coal, will be embraced. I just don’t know when.

A short history of 1960s’ London Gold Pool, and its failure to suppress gold prices…

By the BEGINNING of the 1960s, the US Dollar peg of 35 to 1 ounce of gold was becoming more and more difficult to sustain, writes Julian Phillips at The GoldForecaster.

Gold demand was rising and US gold reserves were falling, both as a result of the ever increasing trade deficits which the US continued to run with the rest of the world.

Shortly after President Kennedy was inaugurated in January 1961, and to combat this situation, newly-appointed Undersecretary of the Treasury Robert Roosa suggested that the US and Europe should pool their gold resources to prevent the private market price for gold from exceeding the mandated rate of US$35 per ounce.

Acting on this suggestion, the central banks of the US, Britain, West Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg set up the “London Gold Pool” in early 1961. One wonders why they were so cooperative with the US.

Granted the gold that left these nations ahead of the war was still in the US and slowly but surely they felt it necessary to get it back. What happened in occupied Europe was that US Dollars became more abundant there and a market in ‘Eurodollars’ sprang up derived in part from US soldiers still in Europe. But the volumes grew more and more as the US established a perpetual Trade deficit feeding the rest of the world with them.

The ‘Pool’ came apart as Europe, under Charles de Gaulle, decided enough was enough and began to send the Dollars earned by Europe back to the US back and exchanged these for their gold. Then they were unwilling to continue accepting US Treasury Bills & Bonds in return. Under the terms of the ‘Bretton Woods Agreement’ signed in 1944, Europe was legally entitled to do this. It would appear that by the time the gold sent to the US before the war had returned to Europe, the US pulled the plug on exchanging gold for Dollars letting the London Gold Pool fold in April 1968. But the demand for gold from Europe did not abate.

By the end of the 1960s, the US once again (as with the 1935 Dollar devaluation against gold) faced the stark choice of eliminating their trade deficits or revaluing the Dollar downwards against gold to reflect the actual situation.

President Nixon decided to do neither. Instead, he repudiated the international obligation of the US to redeem its Dollar in gold just as President Roosevelt had repudiated the domestic obligation in 1933. On August 15, 1971, President Nixon closed the “gold window” at the New York Fed.

In other words the US defaulted on its agreement with Europe and once again Europe tolerated it. We have to ask why? How could a currency with, what was to become perpetually undermined by being printed and exported, continue to stand and become the world’s sole reserve currency and not collapse?

Military might, might add some pressure, but not among the allies. No, the key lay in the then established fact that you could only buy oil with US Dollars.

Nearly everything modern needed oil to work. Most nations import bills comprised 25% of so of oil. The US controlled Opec. and provided their political and military security. In turn the US had a firm grip on all their allies and secured their financial ’empire’.

The last link between gold and the Dollar was gone. The result was inevitable. One of the prices paid by the US was to permit the oil producers to ‘nationalize’ their oilfield, production and the US and British companies that ran them, the ‘seven sisters’. The oil price began to run up from $8 a barrel to $35 a barrel vastly increasing the demand for Dollars and US Dollar liquidity. The US in turn permitted this, provided that the oil producers reinvested the capital they earned into the US Treasury market and US equities and US products (including military hardware). They were allowed to keep the interest income in their own hands under these conditions. This prevented the oil producers posing any financial challenge to the US

The Persian Gulf was defined as part of the US’ ‘vital interests’, as a result. So if the allies in Europe wanted their economies to function properly they had to accept this fact. Quietly they accepted more and more US Dollars into their foreign exchange reserves.

As the oil price rose the pressure on all currencies climbed too. In February 1973, the world’s currencies were “floated”. They were allowed to move to levels that reflected the state of their Balance of Payments. The US was excused all such value measurements because it was so needed by all.

By the end of 1974, gold had soared from $35 to $195 an ounce in an almost mathematically neat progression. This did not make the US happy at all, as it highlighted the real weakening of the US Dollar and the sagacious investor was fully aware of this.

So a war on gold was begun. This was not just manipulation but a transparent bullying attack on real money. At first the tactics used underestimated the power of gold and the trust placed in it.

Nevertheless the common theme to this manipulation was to suppress the gold price.

In the LAST FEW WEEKS the story of Iraq has faded from the headlines to be replaced by the story on the Ukraine, Gaza and on the business front the tumble of the Dow on the New York Stock Exchange, writes Julian D.W.Phillips in this article first shared with subscribers to The GoldForecaster.

But right now in the world we are watching many structural changes taking place quietly but completely. One is the shift of wealth and power to the east, the rise of the Yuan and its use in a growing number of global transactions in the place of the US Dollar. At the moment Russia is turning its economic head towards China and the developed world doing its best to do so too. And still the east is gaining ground and its share of global cash flow has doubled from 20% to 40% since the beginning of the century. This is set to continue strongly.

These developments are sending warning signals to us not just that the developed world’s share is waning, but the grip on the world’s currencies by the US Dollar has to weaken over time. Not only is the threat to the Dollar’s hegemony growing from the Yuan, but key to that role, its dominance over the oil price, is in danger.

Of comfort to the US is its rapid rise to oil self-sufficiency, shrinking the threat from the future oil market to the Dollar oil price. But this is extremely critical to the US because it has to retain Dollar hegemony primarily because it runs a constant Trade deficit. If it is required to pay for goods in currencies other than the Dollar it is in trouble. The Dollar’s loss of its role as the sole global reserve currency will happen, but of more importance will be the loss of its power over global financial markets.

As it is the US Dollar has lost its power over China. With $4 trillion in its reserves and its growing ability to trade in the Yuan and not the Dollar it seems secure from any US action to curb its financial power in the world. The only recourse the US has over China will be over that $4 trillion and we wonder if its actions to prevent BNP Parisbas using the US Dollar could possibly be considered by the US under some circumstances?

Apart from that, the US considers the Middle East oil supplies as part of its ‘vital interests’ in terms of its global power and the power of the Dollar. Ask yourself, if most nations were able to pay Opec in any currency, what importance would the US Dollar hold. Its critical use would be limited to trade with the US The liquidity of the US Dollar market does prevent the easy use of ‘softer’ currencies but the liquidity of the Euro, Sterling, the Swiss Franc and then Yen, together with the arrival of the Yuan on the global scene would provide sufficient liquidity in place of the Dollar. Then where would all those excess Dollars go and what would be their value?

So it is in this context that the importance of the situation in Iraq now becomes of disproportionate importance to the monetary world.

In trying to extrapolate what will happen there we have to look at the Middle East with eyes that are neither geographical nor political. We have to look at the religious battles going on there and see where they are going to see what will happen to the oil price and in what currency it will be traded.

As a glimpse of the importance of these issues, the seizure of an oil tanker sent to the US for the sale of oil by the Kurds of Iraq, by the US last week has caught our attention.

With the declaration of a new country straddling the borders of Syria in the west and Iraq in the east, the scene is set for the full disintegration of Iraq into three countries along sectarian lines. We now look at what countries lie ahead in the region.

Each of the borders to these countries will be embroiled in war against each other. The sectarian issues have overwhelmed any political issues, which are being swamped in the process.

Even the US has lost its influence with the exception of supplying arms to the government it instituted before it left. This government’s history of corruption and prejudice against Sunnis is where the war will become centered.

We see the most northerly ‘country’ being Kurdistan (in cream on the, map), unlikely to want to give up its autonomy rapidly becoming sovereignty and so consolidating its hold on the oilfields of Kirkuk.

The second ‘country’ is the new ‘caliphate’ under the Sunnis (in light brown on the map), again, because of bitter experience of its treatment under an integrated government in Bagdad, unlikely to want to merge into a future integrated government even if moderate Sunnis win out over ISIS (most unlikely). The third ‘country’ will be in the south (in the darker green) under the Shi’ites, in command of the bulk of the nation’s oil (3 million barrels per day) and export terminal at Basra.

While we see this as the outcome, the cost to the country is likely to be extraordinarily high as the polarization of the two sides of Islam, which will, no doubt, come, will leave the rest of Iraq facing religious ‘cleansing’ because of the many remaining mixed areas of the country, including Baghdad (in light green on the map), where blood baths have and will surely ensue as different groups tried to establish their dominance in these ‘undefined’ areas, as you can see on the map here and chase those not of their religion out of those areas.

With Iran, their historic enemy, now lining up drones and other military supplies to help the government of Prime Minister Nuri Kamal al-Maliki retake the north and protect the south, many Sunnis are becoming become further alienated from the state. But we do not see the current ‘support’ of the American instituted government in Bagdad, by Iran, as being committed to that government, but certainly committed to the Shi’ites in the country. This is not about secular government, or simple geography, it is about religion and oil.

The rapid invasion of Iraq by the Islamic State in Iraq and Syria, which supplied the shock troops of the assault on Mosul, has made vigorous efforts to inculcate a new identity for those living within its growing transnational sphere, setting up Shariah courts and publicizing videos in which its fighters burn their passports. Recently, the group issued an eight-page report denouncing the Middle Eastern border system as a colonialist imposition, and included photographs of its fighters destroying what it called “crusader partitions” between Iraq and Syria.

Across the border in Syria, a Kurdish region in the country’s north is also effectively independent of Damascus, with its own military and provisional government. And Turkey, which in the past strongly opposed an independent Kurdish state on its border, now sees the Kurds as a stable buffer between itself and the extremists of ISIS.

In Iraq, it has long been assumed that the Shi’ite heartland of southern Iraq, where the major oil fields are, would give the Shi’ites a tremendous advantage, leaving the Sunnis with only the vast landlocked deserts to the north and west. But northern Iraq also controls both of the country’s major rivers, the Tigris and Euphrates, which flow southward toward Basra.

The prospect of a more formal partition in Iraq or Syria would also lead to mass migrations and further turmoil, judging by some recent examples of state partition, like the division of Sudan in 2011, or that of India and Pakistan in 1947. Those breakups were the result of long struggles and led to terrible violence.

While exports from the terminal at Basra are trying hard to make up for lost exports in the north and the oil price has only hit $115, should the conflict see ISIS try to attack the south-west of Iraq and Bagdad, we do see speculators pushing oil prices up to $140.

We also see Iran taking far more aggressive actions by sending in troops overtly or covertly (which they are doing now) to secure the Shia ‘country’. If the current government collapses (looking very likely right now), we see Iran’s moves to protect the Shi’ites as certainly including controlling Basra.

They would, we feel try to pacify the US and the oil world by maintaining the current production levels. A failure to work with Iran, no matter the political compromise involved, would see oil prices move up over $140 to the detriment of every economy on this globe!

But would Iran be paid in Dollars? Or as we see Iran, currently under the control of the US vis-a-vis its oil exports (until the nuclear issue is resolved), having these controls lifted.

Already it supplies China and will have the option of doing so with Iraqi oil too. With the punishment of BNP Parisbas in mind, we would expect Iran to be happy to receive Yuan (Renimbi) in payment of its oil. This would weaken Dollar hegemony and blaze a trail for other nations to move away from the Dollar (as it is now more overtly political). This will directly impact the global monetary system and Dollar hegemony.

The actions of the Iraqi government in buying 90 tonnes of gold can now be seen in context as its currency begins to lose all credibility, as ISIS robs the banks it invades taking the management of that currency to untenable levels;

With the Middle East responsible for 20% of the world’s physical gold demand last year, we expect their demand to jump not simply at retail levels but at central bank levels. Whenever war comes into the picture, one of the first casualties is the local currency. The Ukraine is a recent example of this. Even though the country is not at full scale war levels, their currency has fallen 45% this year already.

The market is valuing miners as if gold will stay at $1200-1300 forever…

CHARLES OLIVER joined Sprott Asset Management in 2008. Lead portfolio manager of the Sprott Gold and Precious Minerals Fund, his previous team at AGF Management Limited was awarded the Canadian Investment Awards Best Precious Metals Fund in 2004, 2006 and 2007.

Oliver’s own accolades also include Lipper Awards’ best five-year return in the Precious Metals category, and the Lipper Award for best one-year return in the Precious Metals category 2010.

The Gold Report: “Sell in May and go away” is a common investing axiom but does it have any validity?

Charles Oliver: I recently went through some research on seasonality in the gold price. March has been negative in the gold space in six of the last eight years, April has proven negative four out of the last eight years, and May and June have both been negative five of the last eight years. However, we see a fairly dramatic turnaround in July where six of the last eight years have been positive. In August, another six of the previous eight years have been positive; September has been positive five of the last eight years. The “sell in May” adage could actually represent a great buying opportunity on the pullback.

TGR: What are some investment themes you expect to dominate through the rest of the year?

Charles Oliver: It really comes down to printing money. The US has reduced its money printing but it is still aggressively printing. Now we’re hearing about the Europeans potentially getting into quantitative easing. The debasement of currencies is an ongoing theme.

The other key theme is the demand for physical gold. China has become the world’s largest gold buyer, consuming about 40% of the world’s mine production. India, which historically had been the world’s largest gold consumer, has established some tariffs on gold imports, so there’s been some pullback there.

It’s noteworthy that over the last couple of decades the European central banks have been collectively selling gold. That stopped a couple of years ago. Some numbers from the Swiss Customs Authority show that Germany, France, Singapore, Thailand, even the United Kingdom, are fairly significant gold buyers. These are very positive events.

TGR: What about geopolitical events? Do you expect those to dramatically influence gold prices?

Charles Oliver: Historically, wars and the risk of wars have been quite positive for the gold price yet recent events in the Ukraine haven’t seen gold do anything. In fact, it’s trading near the bottom end of its recent range. But should things escalate, I feel strongly that it will have a positive impact. I certainly hope that it doesn’t come to that but the risk seems significant.

TGR: What is the investor pulse in the precious metals space?

Charles Oliver: A year ago investors were selling a little, as they had been for some time. The selling had mostly stopped by the end of the 2013 and the people who didn’t have long-term conviction had left. In early 2014 I was a bit surprised to see US value investors streaming in because we had been through a period of net redemptions. When the Americans come into the market they can have quite a dramatic impact on prices. I’ll call it sporadic because it has not been a consistent stream.

TGR: What happened to those bids?

Charles Oliver: Generally speaking, American investors, portfolio managers and pension funds were saying at the end of 2013, “We’ve had some good returns in the general market but the market is looking somewhat expensive.” They were looking for areas where there was good value. The gold price had been hammered over the last couple of years so they were starting to move some of their allocations into that space. We’ve also seen some private equity buying assets and taking them private. And some Asian interests are dipping their toes in the water. People are starting to wake up and show some interest but they are still waiting for some sort of trigger in order to say that this is the time to jump in.

TGR: Any idea what that could be?

Charles Oliver: I’ve spent a lot of time thinking about that question. I liken the 1974 to 1976 period to today. In 1974, the oil price was going up after the oil embargo and inflation was going up, too. It was peculiar because the gold price went from about $200 to $100 per ounce over the next couple of years. Then in 1976 gold suddenly went from $100 per ounce to about $800 per ounce. I have spent a lot of time trying to determine the trigger for that event. Sometimes it is just time. When I look back at 2013, I see a lot of positive fundamentals – strong Chinese demand, huge amounts of money printing – yet the gold price went down. Sometimes it’s just the way the markets time themselves.

TGR: Do investors need to revise their price expectations for precious metals equities? There is zero froth in this market.

Charles Oliver: I think that’s a good way of putting it. I’m continually trying to figure out where the market may go. Not too long ago I said that by the end of this decade gold should be approaching something like $5,000 per ounce, which would have a huge impact upon the markets and stock valuations. The market is valuing equities as if gold is going to stay at $1200-1300 per ounce forever. I believe that the market will be proven wrong over time.

TGR: Gold is trading at roughly 67 times silver. Does that make silver your preference?

Charles Oliver: Yes. It was Eric Sprott who came up with the thesis and I fully embrace it. For over 1,000 years, the silver-gold price relationship was close to 16:1, so that implies that if gold is $1600 per ounce, the silver price would be $100 per ounce. The last time that happened was 1980 when the gold price was roughly $800 per ounce and the silver price was around $50 per ounce. Over the next couple of years, I expect to see that 67:1 ratio migrate toward 16:1.

TGR: Yet the trend is moving in the opposite direction.

Charles Oliver: In the short term sometimes these things happen. About 25% of the weighting in the Sprott Gold and Precious Minerals Fund (TSX:SPR300) is in silver equities, which is probably among the highest in the peer group for precious metals funds.

TGR: What’s your investment thesis for silver versus gold?

Charles Oliver: About two-thirds of mined silver is used in industry, whereas gold has virtually no industrial usage. Gold is considered a reserve currency whereas silver is not. About 150 years ago many countries had silver reserves backing their currencies. Today they don’t but China has trillions of US dollars that it is converting into hard assets. The Chinese are buying a lot of gold but if they ever decide to be a silver buyer we would see a huge shift in the price of silver. Look at every mined commodity out there today – copper, nickel, zinc, iron ore – China accounts for 40-50% of global consumption.

TGR: Is it all about margin for precious metals equities?

Charles Oliver: A lot of these companies are producing gold at $1000 per ounce or silver at $18 per ounce. Should silver go up to $30, that $2 per ounce margin suddenly becomes $12 per ounce – a sixfold increase. Shifts in commodity prices could have huge impacts on the profitability of these companies.

TGR: In March you said that gold would reach $5,000 per ounce within a few years. That seems optimistic.

Charles Oliver: It’s based on the historical relationship between the Dow Jones Industrial Average and the gold price. Over the last 100 years there have been three times when it has cost 1 to 2 ounces gold to buy the Dow. The last time was 1980 when the gold price was $800 per ounce and the Dow was 800.

People roll their eyes when you forecast big numbers. In 2004 or 2005, I said gold would reach $1000 per ounce. When it reached $1000 per ounce, I moved to $2000 per ounce and we almost got there. With the willingness of the market to continue to print money, I believe that we are going to get that 2 or 3 to 1 relationship with the Dow. With the Dow at 16,000, I think $5,000 per ounce is achievable. It’s not really that the gold price is increasing, it’s that paper currencies are depreciating in value.

GOLD DEMAND went up from 3,200 tonnes in 2003 to 4,400 tonnes in 2013, writes Chris Martenson at Peak Prosperity, citing World Gold Council data.

That’s even with a massive 800 tonnes being disgorged from the GLD tracking fund over 2013 (purple circle, below):

Note the dotted red line in this chart: it shows the current level of mine production. World demand has been higher than mine production for a number of years. Where has the additional supply come from to meet demand?

We’ll get to that soon, but the quick answer is: it had to come from somewhere, and that place was ‘the West.’

A really big story in play here is the truly historic and massive flows of gold from the West to the East, with China being the largest driver of those gold flows.

Alasdair McLeod of GoldMoney.com has assembled the public figures on China’s cumulative gold demand which, notably, do not include whatever the People’s Bank of China may have bought. Those are presumably additive to these figures unless we are to believe that the PBoC now purchases its gold over the counter and in full view (which they almost certainly do not).

Using publicly available statistics only, it’s possible to calculate that in 2013 China alone accounted for more than 2,600 tonnes of demand, or more than 60% of total demand or, as we’ll soon see, almost all of the world’s total gold mine production:

Of course the big risk in all that Chinese demand for gold is that China may stop buying that much gold in the future for a variety of reasons.

One could be that the Chinese bubble economy finally bursts and people there no longer feel wealthy and so they stop buying gold.

Another could be that the Chinese government reverses course and makes future gold purchases illegal for some reason. Perhaps they are experiencing too much capital flight, or they want to limit imports of what they consider non-essential items.

Who knows?

I do know that Chinese demand has been simply incredible and, keeping all things equal, I expect that to continue, if not increase.

India, long a steady and traditional buyer of gold, saw so much buying activity as a consequence of the lower gold prices that the government had to impose controls on the amount of gold imported into the country, even banning imports for a while:

Another factor driving demand has been the reemergence of central banks as net acquirers of gold. This is actually a pretty big deal. Over the past few decades, central banks have been actively reducing their gold holdings, preferring paper assets over the ‘barbarous relic.’

Famously, Canada and Switzerland vastly reduced their official gold holdings during this period (to effectively zero in the case of Canada), a decision that many citizens of those countries have openly and actively questioned.

The UK-based World Gold Council is the primary firm that aggregates and reports on gold supply-and-demand statistics. Here’s their most recent data on official (i.e., central bank) gold holdings:

Note that the 2009 data is lowered by slightly more than 450 tonnes in this chart to remove the one-time announcement by China that it had secretly acquired 454 tonnes over the prior six years, so this data may differ from other representations you might see. I thought it best to remove that blip from the data. Also, the data for 2012 and 2013 must also be lacking official China data because the last time they announced an increase in their official gold holdings was in 2009.

In just 2013 alone, the gap between China’s apparent and reported gold consumption was over 500 tonnes and the Chinese central bank, for a variety of reasons, is the most likely candidate to have absorbed such a quantity. If true, then China alone increased its official reserves by more than the rest of the world combined in 2013.

The World Gold Council puts out what is considered by many to be the definitive source of gold statistics, which are the source data for the above chart. I do not consider the WGC to be definitive since their statistics do not comport well with other well reported data, but let’s first take a look at what the WGC had to say about gold demand in 2013:

The big story there, obviously is that investment demand absolutely cratered even as jewelry and coins and bars rose to new heights. And nearly all of that investment drop was driven by flows out of the GLD investment vehicle. That is, gold was chased out of the weak hands of mainly western investors and into the strong hands of Asian buyers who wanted physical bullion and jewelry.

This huge drop in total demand, led by plummeting investment demand, fits quite well with the 15% price drop recorded in 2013. So the WGC tells a nice coherent story so far.

But the problem with this tidy story is that it simply does not fit with the above data about China’s voracious appetite for gold, let along India’s steady demand and rising demand in Europe, the Middle East, Turkey, Vietnam or Russia.

The summary of the fundamental analysis of gold demand is:

there is a huge and pronounced flow of gold from the West to the East;

there is rising demand from all quarters except for the hot money GLD investment vehicle (which I have never been a fan of);

all of this demand has handily outstripped mine supply which means that someone’s vaults are being emptied (the West’s) as someone else’s are rapidly filling (the East’s).

Now about that supply…

Not surprisingly, the high prices for gold and silver in 2010 and 2011 stimulated quite a bit of exploration and new mine production. Conversely, the bear market from 2012 to 2014 has done the opposite.

However, the odd part of the story for those with a pure economic view is that with more than a decade of steadily rising prices, there has been relatively little incremental new mine production. For those of us with an understanding of depletion it’s not surprising at all.

In 2011 the analytical firm Standard Chartered calculated a rather subdued 3.6% rate of gold production growth over the next five years based on lowered ore grades and very high cash operating costs:

“Most market commentary on gold centres on the direction of US Dollar movements or inflation/deflation issues – we go beyond this to examine future mine supply, which we regard as an equally important driver. In our study of 375 global gold mines and projects, we note that after 10 years of a bull market, the gold mining industry has done little to bring on new supply. Our base-case scenario puts gold production growth at only 3.6% CAGR over the next five years.”

Since then, the trends for lower ore grade and higher costs have only gotten worse. But the huge drop in the price of gold in 2011 and 2012 was the final nail in the coffin and resulted in the slashing of CAPEX investment by gold mining companies.

Of course, none of this is actually surprising to anyone who understands where we are in the depletion cycle, but it’s probably quite a shock to many an economist. The quoted report goes on to calculate that existing projects just coming on-line need an average gold price of $1400 to justify the capital costs, while green field, or brand-new, projects require a gold price of $2000 an ounce.

This enormous increase in required gold prices to justify the investment is precisely the same dynamic that we are seeing with every other depleting resource: energy costs run smack-dab into declining ore yields to produce an exponential increase in operating costs. And it’s not as simple as the fuel that goes into the Caterpillar D-9s; it’s the embodied energy in the steel and all the other energy-intensive mining components all along the entire supply chain.

Just as is the case with oil shales that always seem to need an oil price $10 higher than the current price to break even, the law of receding horizons (where rising input costs constantly place a resource just out of economic reach) will prevent many an interesting, but dilute, gold ore body from being developed. Given declining net energy, that’s that same as “forever” as far as I’m concerned.

Just like any resource, before you can produce it you have to find it. Therefore the relationship between gold discoveries and future output is a simple one; the more you have discovered in the past, the more you can expect to produce in the future, all things being equal. This next chart should tell you everything you need to know about where we are in the depletion cycle for gold, as even with the steadily rising prices between 1999 and 2011 (going from $300 and ounce to $1900), gold discoveries plummeted in 1999 and remained on the floor thereafter:

Here we see that the 1990 saw quite a number of large discoveries that are currently in production but which were not matched in later years. Since it takes roughly ten years to bring a mine into full production following discovery, it’s fair to say that we are currently enjoying production from the discoveries of the 1990’s. Future gold production will largely be shaped by the discoveries made since then.

In other words: expect less gold production in the future.

Meanwhile, there will be more money, more credit, and more people (especially in the East) competing for that diminished supply of gold going forward.

Let’s take another angle on gold supply, but which circles back and supports the above chart showing fewer and smaller discoveries in recent years.

The United States Geological Survey, or USGS, keeps a mountain of data on literally every important mined substance. I think it’s staffed by credible people, doing good work, and I’ve yet to detect political influence in their reported statistics.

At any rate, the latest assessment on gold reveals that their best guess for world supply is that something on the order of 52,000 tonnes of reserves are left. Which means that, at the 2012 mining rate of 2,700 tonnes, there are 19 years of reserves left:

This doesn’t mean that in 19 years there will be no more new gold to be had, as reserves are always a function of price; but it gives us a sense of what’s out there right now at current prices.

As much as I like the folks at the USGS, however, I will point out one glaring discrepancy in their data as a means of exposing why I think these reserves, like those for many other critical things like oil, are probably overstated. And that story begins with South Africa (highlighted in the table above with the blue dotted line.)

There you’ll note that, at 6,000 tonnes, South Africa has the second largest stated country reserves. However, according to official South African data, they claim to have an astonishing 36,000 tonnes of reserves. Which is right?

Neither as it turns out.

First, the true story of South African gold production is completely obvious from the production data. It’s a story of being well and truly past the peak of production:

And not just a little bit past peak, but 44 years past; down a bit more than 80% from the peak in 1970. The above chart is simply not even slightly in alignment with the claims of the South African government to have 36,000 tonnes of reserves. But pity the poor South African government which knows that gold exports represent fully one third of all their exports. Of course they will want to claim massive reserves that will support many future years of robust exports.

Instead, the South African production data can be modeled by the same methods as any other depleting resource and one such analysis has been done and arrived at the conclusion that there are around 2,900 tonnes left to be mined in South Africa.

The analysis is quite sound; and the authors went on to point out that the social, economic, energy, and environmental costs of extracting those last 2,900 tonnes are quite probably higher than the current market value of those same tonnes. If they are extracted, South Africa will be net poorer for those efforts. This is the same losing proposition as if it took more than one barrel of oil to get a barrel of oil out of the ground – the activity is a loss and should not be undertaken.

For lots of political and economic reasons, however, gold mining will continue in South Africa. But, realistically, someone in government there should be thinking this through quite carefully.

The larger story wrapped into the South African example is this: perhaps there are 19 years of global gold reserves left (at current rates of production), but I doubt it.

Instead, the story of future gold production will be one of declining production at ever higher extraction costs – exacerbated by the 80,000,000 new people who swell the planet’s population every twelve months, the hundreds of millions of people in the East who enter the ranks of the middle class annually, and trillions of new monetary claims that are forced into the system each year.

And this brings me to my final point of this part of the public part of this report. Scarcity.

If we cast our minds forward ten years and think about a world with oil costing 2x to maybe 4x more than today, we have to ask ourselves some important questions:

How many of our currently-operating gold and silver mines, or the base metal mines from which gold and silver are by-products, will still be in operation then?

How many will simply shut down because their energy costs will have exceeded their marginal economic benefits?

After just 100 years of modern, machine-powered mining, all of the great ore bodies are gone, most of the good ones are already in operation, and only the poorest ones are left.

By the time you are reading stories like this next one from the Wall Street Journal, you should be thinking, Why are we going to all that trouble unless that’s the best option left?

JOHANNESBURG – With few new gold strikes around the world that can be turned into profitable mines, South Africa’s gold miners are planning to dig deeper than ever before to get access to rich veins.

The plans raise questions about how to safely and profitably mine several miles below the surface. Success would mean overcoming problems such as possible rock falls, flooding and ventilation challenges and designing technology to overcome the threats.

Mark Cutifani, chief executive officer of AngloGold Ashanti Ltd., has a picture in his office of himself at one of the deepest points in Africa, roughly 4,000 meters, or 13,200 feet, down in the company’s Mponeng mine south of Johannesburg. Mr. Cutifani sees no reason why Mponeng, already the deepest mining complex in the world, shouldn’t in time operate an additional 3,000-plus feet deeper.

“The most critical challenges for all of us in South Africa are depths and depletion of reserves,” Mr. Cutifani said in an interview…

The above article is just a different version of the story that led to the Deepwater Horizon incident. Greater risks and engineering challenges are being met by hardworking people going to ever greater lengths to overcome the lack of high quality reserves to go after.

By the time efforts this exceptional are being expended to scrape a little deeper, after ever smaller and more dilute deposits, it tells the alert observer everything they need to know about where we are in the depletion cycle, which is, we are closer to the end than the beginning.

Perhaps there are a few decades left, but we’re not far off from the day where it will take far more energy to get new metals out of the ground compared to scavenging those already above ground in refined form.

At that point we won’t be getting any more of them out of the ground, and we’ll have to figure out how to divvy up the ones we have on the surface. This is such a new concept for humanity – the idea of actual physical limits – that only very few have incorporated this thinking into their actions. Most still trade and invest as is the future will always be larger and more plentiful, but the data no longer supports that view.

We are at a point in history where we can easily look forward and make the case for declining per-capita production of numerous important elements just on the basis of constantly falling ore grades. Gold and silver fit into that category rather handily. Depletion of reserves is a very real dynamic. It is not one that future generations will have to worry about; it is one with which people alive today will have to come to terms.

The issue of Peak Cheap Oil only exacerbates the reserve depletion dynamic by adding steadily rising energy input costs to mix. Should oil get to the point of actual scarcity, where we have to ration by something other than price, then we must ask where operating marginal mines slot onto the priority list. Not very highly, would be my guess.

For all the reasons above, it’s only prudent to consider gold an essential element of a sound investment portfolio.

Hard Assets Investor: A few years ago, all the talk was inflation, hyperinflation. It didn’t pan out; we saw a big pullback in commodities. But now those very same people are talking about deflation. Maybe we should put on that inflation trade after all?

Peter Cardillo: I think it’s too early. But eventually, we will have inflation, there’s no question about that. As far as deflation is concerned, Europe could be facing a sort of Japanese deflation period. But I don’t think they are just yet. In fact, just the other day the ECB had its monthly meeting, and Mr. Draghi, went out of his way to say, “Inflation is low. It’s certainly not where we would like it to be. But we’re not that far apart from the American inflation rate.”

So he sort of threw ice on the fact that maybe deflation is really setting in. To a certain degree, I’d have to agree with him. As you said, all the hoopla about the quantitative easing producing massive inflation never really came to fruition. I suspect one of the reasons for that is that we have ample amount of crude oil, which is the key to inflation, and the fact that the Federal Reserve managed so far to contain the flow of quantitative easing without pumping up commodity prices. Now, sure, we had a scare in gold prices. And we saw gold prices go way up. But we never really saw the key inflationary core oil take off.

Hard Assets Investor: When you look around the world, you see a lot of new oil production, specifically in this country. Economic activity all over the world pretty much is weak. We have very high unemployment levels still. Yet the oil price has been stable at $100. Isn’t that saying there is a lot of underlying demand?

Cardillo: As you pointed out, America is producing much more oil now than ever. We’re becoming net exporters. Look around the globe. Where is oil really being pumped out of now, that it wasn’t before? Africa, North Africa, even in South Africa there are producing wells now. And Africa is becoming a major player in the oil market.

Hard Assets Investor: Would you be short oil? Would you be away from the oil sector, or defensive on the oil sector right now?

Cardillo: No, I would be neutral to it. And I think that eventually we will see higher oil prices, but not to the point where … unless there’s some geopolitical problem that arises that’s a real serious threat. And you know what? That’s another factor. We had that scare when we had the Arab Uprising throughout North Africa, within the Middle East region. And yet we saw prices actually come down. Again, it’s a function of supply and demand. And the supply is out there.

Hard Assets Investor: A lot of the gold bugs from several years ago aren’t heard so much anymore. In fact, some of them are saying, now, it’s going down.

Cardillo: I don’t think it’s going to really collapse like a lot of people have been forecasting. I think we’re probably going to see $1350 very shortly. I think the fear factor of the Fed reducing stimulus has been already placed in the market. I believe you should always have a 5-10% gold within your portfolio. So are we going to $2000 anytime soon? No. Are we going to $800 anytime soon? No. I think we’re just going to stay in the trading range until we get some evidence of inflation.

So, certainly, quantitative easing has not really been all that negative for the price of gold, but certainly not all that positive, because it hasn’t produced inflation.

Hard Assets Investor: The initial run-up, everyone stampeded into it. And then, when nothing happened, it was this slow leak that eventually precipitated into a crash.

Cardillo: Well, you want to call it a crash, I want to call it a correction. We’re down 600, 575, 600 points from the high level. But we’re also up from 1981; we also came up from a low of $250. So if you take that against the present price today, then percentage-wise the price of gold has steadily gone up.

Hard Assets Investor: Sum up your view for 2014; how do you see things playing out?

Cardillo: I see the economy growing at 3%, possibly even 3.25%. I see the labor market producing 200,000 to 250,000 new jobs, though the past two months it hasn’t panned out that way. There were special factors in there, seasonal factors. And, above all, the weather factor. If you look at the unemployment rate dropping down to 6.6% for this time, it meant something, because the participation rate actually went up a bit. So that’s good news, not bad news.

I think inflation probably will stay pretty much under what the Fed is looking for. But a lot depends on what happens with the geopolitical situation – probably nothing much in the Middle East; if anything, it can actually improve.

Hard Assets Investor: It looks pretty calm right now.

Cardillo: I’m looking for a good year in terms of economic activity. I think Europe will continue to pull out of its recession – it’s out of recession. I think you’ll see growth beginning to pull up throughout the European Continent.

The US economy that is. And hope springs eternal for these market doomsters…

“AFTER listening to some of this morning’s speakers, I made sure to program the number of the suicide hotline into my cell phone,” real estate expert Andy Miller joked at the beginning of his speech, writes Shannara Johnson, chief editor at Doug Casey’s research group, summarizing last week’s Casey Research’s investment summit 2013.

And legendary natural-resource investor and chairman of Sprott US Holdings, Rick Rule, quipped, “It’s amazing – I actually get to be the positive guy here.”

He summarized the main drift of the conference by paraphrasing behavioral psychologist Paul Watzlawick: “The situation is hopeless, but it need not be serious.”

Rather than a reason to shy away from buying stocks, he reminded the audience, bear markets like the one we’re seeing in gold right now are the greatest opportunity to load up on the best junior resource companies at fire-sale prices. You wouldn’t insist on buying any other product when prices are high and shun it when it’s on sale – so why act differently with stocks?

“You’ve already been through this,” he said, “you’ve been through the pain. Why not hang on a little longer and actually enjoy the gain?”

That there’s pain ahead became abundantly clear during Dr. Lacy Hunt’s presentation, which ripped the rose-colored glasses off even the most blissful ignoramuses and received the vote for “most depressing speech” by many audience members.

HIMCO Executive VP Hunt – a high-profile speaker who served as senior economist at the Dallas Fed and as the chief US economist for banking giant HSBC – presented the dire facts in a pointed, easy-to-understand way. The cheerful title: “How Debt-Induced Monetary and Fiscal Policies Are Undermining the US Economic Prosperity.”

Hunt is convinced that the US economic recovery is a sham. “Consumer spending,” he said, “is at 2%, that’s very low. We’ve seen lower percentages before, but never in a phase of economic expansion.”

He compared economic growth throughout the entire US history with what we’re seeing today. In terms of GDP growth – currently a pathetic 1.6% – we’re only doing marginally better than in the 1930s, during the Great Depression.

Then he fired off charts with dismal graph lines and numbers, one after another:

The US birth rate in the last two years is the lowest since the 1920s and will soon lead to redundancies in elementary and then middle schools;

One out of 6.5 Americans is now on food stamps;

The number of 25- to 30-year-olds living with their parents is at 36%, an all-time high;

Federal debt is currently 100% of GDP, and the US government is $60 trillion in the hole on unfunded liabilities – the only way to feel good about this is to look at Europe, which is worse off at $70 trillion;

Unemployment is not getting better, capital spending is not getting better, and we’re seeing a significant decline in US imports and exports, as well as the average American’s standard of living;

Current Fed policy is making things worse, Hunt said. Corporate profits are down, capital spending and investment is down, and we’re seeing “a significant decline in both US exports and imports.” Median household income has dropped 3% and is now equal to that in 1995, and the personal savings rate is the lowest since 1929.

If the Federal Reserve wants to phase out QE, Hunt said, there’ll be tremendous exit costs. Even though studies from top researchers at Stanford, Princeton, and Berkeley have found that “an expansion of reserves contracts the economy,” the Fed is like a runaway train. It’s now so committed to what it is doing that despite the plethora of negative data, it just won’t stop.

I sort of wish he still worked for the Federal Reserve – it’d be nice if they had at least one person with some common sense on their payroll.

James Rickards, Currency Wars author and senior managing director of Tangent Capital Partners, agreed with Lacy Hunt that all the talk of economic recovery is a bad joke: “If you want to know what a depression feels like, this is it.”

He said most economists have been dead wrong in their recent forecasts because they assume we’re in a normal business cycle – but this is anything but normal. According to Rickards’ analysis, we’re due to enter the second recession within this prolonged depression, which he believes will start in early 2014.

“Deflation is the Fed’s worst nightmare,” he said. To maintain a semblance of control over the economy, Bernanke & Co. have to manipulate Americans into behaving in certain ways – by keeping real interest rates in negative territory, they encourage people to borrow, and they use inflation expectation shocks to encourage them to spend.

In the last installment of the game, Rickards said, the Fed will employ the “helicopter money” tactic, putting more money directly into the hands of the populace by persuading the US government to provide tax cuts.

How did he manage to accurately predict that there would be no easing of the easing this year? Simple: “The Fed said, ‘We taper if the economy grows according to our forecasts’ – but their forecasts are always wrong.”

He said Bernanke is playing a very dangerous game: “The Fed thinks it’s playing with a thermostat, but in fact it’s playing with a nuclear reactor, and if they do something wrong, they’ll cause a meltdown.”

Aside from money, it’s indeed energy that makes the world go around – so the Energy Panel with Spencer Abraham, former US energy secretary, Lady Barbara Judge, chairman emeritus of the UK Atomic Energy Authority, Uranium Energy Corp. CEO Amir Adnani, and oil explorers Keith Hill of Africa Oil and Michael Greenwood of PRD Energy was one of the most raptly watched events of the Summit.

One of the topics was shale oil exploration and fracking, a topic that is becoming more and more critical for European countries striving to get out of Russia’s energy chokehold.

Michael Greenwood said that PRD Energy, which is currently test-drilling in an oil-rich area in Germany, is moving cautiously. Unions and environmental groups in many European countries vehemently oppose fossil fuel exploration and fracking, but he believes that sooner or later, those countries will have to deal with these important matters of national energy security.

(As an interesting aside, the documentary Gasland, which created a worldwide anti-fracking hysteria, was funded by Abu Dhabi and Russian state-owned oil and gas company Gazprom.)

Lady Barbara Judge also sees a future for nuclear power in Europe, despite the current negative attitude, because “the CO2 story will make oil less and less attractive, and green energy doesn’t work.”

Africa Oil President and CEO Keith Hill agreed. Since the cheap, easy-to-extract oil is pretty much gone, he believes the oil price will go to $200 per barrel in the not-too-distant future. “Eventually oil is going to price itself out of the market. It’s still the best energy out there, but in the next 20 years, other forms of energy will become more and more important.”

Andy Miller, partner and co-founder of the Miller Frishman Group, stepped up to the podium to give a much-needed update on real estate. He believes that the housing market is headed into another recession.

“I don’t see a recovery, I see a manipulated market,” he said, pointing out that the US home market also has an impact on consumer spending and employment.

More and more single-family homes are now owned by large hedge funds and other institutional investors, and the government is forcing them to fix up the homes and rent them out. “When you buy a single-family home, all you can hope for currently is a 3% yield,” said Miller. “So they’re in it for an appreciation play.”

It’s a dangerous game, though: “First-time homebuyers and individual investors are a fickle crowd; they get out of the market immediately when the numbers don’t work for them.” And the recent rate increases have already removed a lot of purchasing power from buyers.

Overall, the news from the housing market is not that good:

New-home sales have fallen since 2008;

20-22% of Americans are underwater with their mortgage, but Miller believes that the real number of “zombie homeowners” who can’t sell or move may be around 40-45%;

Car and truck sales are trending up – a bad omen, said Miller, because “no one goes out and buys both a house and a new car.”

His personal strategy: He circled 250 minor markets in the US and bought multi-family homes in resource-rich, booming regions.

How important are Fannie Mae and Freddie Mac for the mortgage market? “They dominate the market right now; if you turned it over to the private sector right now, it would be a calamity.”

That something big – and potentially nasty – is coming is not hard to believe after listening to Dr. Elizabeth Lee Vliet and Marc Victor.

Dr. Vliet is an acclaimed expert on Obamacare, and has nothing good to say about it. The “Affordable Care Act” will indeed make health care more expensive, she said (Ron Paul quipped in his keynote speech that if you want to know what a government bill really does, just assume the opposite of its name).

But that’s not the worst of it: Americans will actually lose their choice of treatment. Government-appointed panels will decide what kinds of treatment are appropriate for you, and if Dr. Ezekiel Emanuel (brother of Rahm Emanuel) has his way, many surgeries and other treatments will be “attenuated” (i.e., rationed) for those over 45. That means expensive procedures like hip replacement or triple bypass probably won’t be approved.

“No problem,” you say, “I’ll pay for it myself, then.”

But no, you may not even get surgery if you’re loaded. According to Dr. Vliet, “hold harmless” clauses in many health insurance contracts prevent doctors and hospitals from providing care that government or insurance reviewers have deemed medically unnecessary. Most patients have no clue these provisions exist. So you have two options: suffer in silence (and die quietly, if you please), or become a medical tourist.

We’re moving toward a single-payer system, as in the UK, said Dr. Vliet. “In the UK, if you suffer from macular degeneration, you have to go blind in one eye before you can get surgery to save your remaining eye.” Prostate cancer, which is very treatable when taken care of early, has a 90% survival rate in the US. In the UK, with 18- to 24-month waiting lists, it’s only 53%.

But it’s not just our health care needs that will be completely run by the government, said Arizona criminal-defense attorney and liberty advocate Marc Victor: the police state is already upon us.

He’s not one to mince his words: “If you believe that the Constitution is protecting you, let me tell you: the Constitution isn’t protecting you from anything. It’s merely words on paper; any creative lawyer can interpret them any way he wants.”

If you have a car, they own you, he says. For example, if you get in a traffic stop with drug-sniffing dogs, there are two signs that the dog “alerts”:

The dog changes its respiratory pattern;

The dog changes its posture.

In other words, “if the dog ‘alerts’ for any reason, or the dog’s handler says it does, they’re going to rip your car apart.”

On a regular basis, Victor holds classes on what to do when you get pulled over in a traffic stop. “Most of my advice is about how not to get yourself killed, never mind the ticket. Don’t try to get out of a ticket; just pay it and keep your mouth shut – you don’t know who you’re messing with.”

You can hear all of the presentations and panel discussions – including detailed investment advice and specific stock picks from the Casey editors – via our Summit Audio Collection on CD and MP3. For just another few days, you’ll save $100 by pre-ordering.